Close Brothers Ltd v Ridsdale and others

Personal guarantee – Liability – Defendants guaranteeing liability of company under loan facility to fund property development – Facility agreement expiring – Facility period extended to cover funding of first phase of development only – Whether defendants liable on personal guarantee – Whether relieved from liability on ground of material change to underlying transaction to which their informed consent not given – Whether guarantee covering such change to facility – Claim allowed In March 2008, the first defendant obtained an offer of finance from the claimant merchant bank for a property development project to be carried out through his company, the third defendant. The project comprised the redevelopment of a former garage in Puddlestown, near Dorchester in Dorset, by the construction of six new dwellings and works to three existing Grade II listed cottages on adjacent land. The loan facility of £2.925m, intended to fund the acquisition of the site and its development, was to be available for a period of 12 months expiring in March 2009. The first defendant and his wife, the second defendant, gave joint and several personal guarantees in the sum of £350,000; the terms of the guarantees acknowledged that their guarantee liabilities would not be “reduced, discharged or otherwise adversely affected by… any variation, extension, discharge, compromise, dealing with, exchange or renewal of any right or remedy which the Creditor may… have in respect of any of the obligations and liabilities… under and in respect of any of the Facility Documents”.In light of delays in the progress of the works and the downturn in the economic climate, the claimant proposed to restructure the loan facility to provide for phasing of the development; the facility was to be reduced to cover only the first phase, comprising the development and sale of the existing cottages. Several extensions of the facility were granted on those terms, the last expiring in April 2010. The loan was not repaid and the claimants sought to recover under the first and second defendants’ personal guarantees.The first and second defendants disputed their liability on the guarantees. They contended that: (i) the revision of the facility agreement to introduce phasing was a fundamental change to which their consent was required, since it materially affected the risk that they assumed under the guarantee; (ii) they had given no informed consent since, inter alia, they had relied on an assurance by the claimant that it would not seek repayment of the facility before all phases were completed and the property sold; and (iii) the revised facility agreement amounted to a fresh contract rather than a variation covered by the terms of the guarantee. Held: The claim was allowed. A surety would be released from liability under a guarantee if there was a material change to the underlying or primary agreement in respect of which the guarantee was given, of a kind that materially affected the risk assumed by the surety, unless the surety had notice of the change and consented to it: Holme v Brunskill (1877) 3 QBD 495 applied. The changes to the facility agreement were material since they exposed the first and second defendants to an increased chance of being liable under their guarantees. Under the revised facility agreement, the claimant was only committing itself to funding the first phase of the project, rather than the whole project as it had previously done. If the project was not completed then the possibility of making a profit on it would be lost and the company might not realise enough from the project to discharge all its liabilities to the claimant. However, the first and second remained liable on the ground that they had consented to the change in the underlying transaction. On the evidence, the claimant had given no assurance of the kind alleged by the first and second defendants, so as to preclude the giving of informed consent. The risk that the claimant would cease to provide funding beyond the first phase had been spelled out in correspondence and in the extended facility itself.If, and so far as, the matter turned on issues of equity, then those should be resolved in favour of the claimant. It was in the interests of the first and second defendants that the facility should continue, even if on more restricted terms. The extended facility kept open the possibility of the project proceeding to a full conclusion. It would be inequitable to hold that the first and second defendants were relieved from the continuance of the guarantee, which was an important part of the transaction from the claimant’s viewpoint. Even if the claimant had made any representation, the first and second defendants had suffered no detriment in reliance on it, since they would have acted in the same way regardless. The revised facility agreement did not fall outside the scope of the original guarantees given by the first and second defendants. The terms of that guarantee were standard in guarantees drafted by banks and would usually be effective to avoid a guarantee being rendered ineffective by a change in the agreement between the parties to the underlying transaction. In form, each of the revised facility agreements was a variation or amendment of what had gone before. The mere fact of extending the period of the facility did not take it outside the original guarantee. Although the introduction of phasing was a material change to the underlying transaction so as to require the first and second defendants’ consent, it was not such a fundamental change as to make the extended facility a new agreement. The time extension and the introduction of phasing were precisely the sort of changes that the terms of the guarantee were intended to anticipate. Max Thorowgood (instructed by AWB Partnership, of Guildford) appeared for the claimant; Gavin Hamilton (instructed by Lawrenson Solicitors, of Broadstone) appeared for the first and second defendants; the third defendant did not appear and was not represented. Sally Dobson, barrister